According to The Australian Financial Review, Japanese institutions have returned to the Australian government bond market after two months away, drawn back by the relatively high returns in a world of negative yields.
However, the cost of offsetting the currency risk as the yen edges higher against most currencies means investor appetite for the relatively high-yielding paper is waning relative to other assets, including mortgage-backed securities in the US, analysts say.
"While nominal and real yields are important, what matters most for Japanese investors is the hedged foreign exchange return," wrote TD Securities rate strategist Prashant Newnaha.
"This has mattered more so this year than most other years because yen strength has been relentless, with the cross with the Australian dollar close to testing multi-year lows just last month," he said.
According to the Japan's Ministry of Finance, Australian dollar-denominated bond purchases were worth $2 billion in May. Of this, $1.7 billion was spent on 10-year and 20-year government bonds and $300 million on issues from non-residents such as supranational and sovereign agencies (SSA).
Central bank bond buying – or quantitative easing – over recent years has driven yields along the maturity curve below zero in Japan and Europe, making returns of 2 per cent or more in Australia particularly attractive.
Bank of Japan governor Haruhiko Kuroda formally announced a negative rate strategy in January, pushing more institutional investors abroad.
Australia, though, was out of favour at that time as commodity prices slumped on fears about Chinese growth and the Australian dollar fell to as low as US68.27¢.
By February, however, Japanese investors were back with a vengeance, buying a net $3.9 billion in $A-denominated securities, including $2.5 billion in government bonds.